Feb. 1 (Bloomberg) -- Stifel Financial Corp. Chief
Executive Officer Ron Kruszewski paused in mid-sentence and
asked an employee for the list, a chart showing in red which of
the St. Louis-based firm’s rivals have closed or sold out.

“There’s this huge consolidation,” Kruszewski, 54, said
in an interview in his office, referring to the once crowded
field of U.S. regional and local brokerages that vied to serve
mid-size companies. “What’s left is very few firms that ever
were in the middle market. We’re one of them.”

About a dozen golf putters lean against a table. Nine
floors down, the lobby is being remodeled with glass and white
stone, while a bronze bull and bear statue is planned for
outside. The way Kruszewski views it, St. Louis is now the No. 2
U.S. brokerage hub after New York. From his window he can see
the Edward Jones Dome, the stadium named for the city’s other
prominent securities firm and home field of the National
Football League’s Rams.

Kruszewski is looking to U.S. brokerage-industry turmoil to
provide yet more opportunities to grab market share and grow
after a decade of acquisitions propelled Stifel ahead of peers.
Smaller firms including Rodman & Renshaw LLC and WJB Capital
Group Inc. are shuttering operations or selling themselves to
larger companies as a drop in trading and lower commissions
squeeze margins. Meanwhile, so-called bulge-bracket banks such
as Citigroup Inc. and UBS AG are cutting employees and units as
they retrench in the wake of the financial crisis.

‘Wildest Dreams’

Navigating that shakeup is key to reigniting Stifel’s
stock, which snapped a nine-year ascent in 2011, as it fell 23
percent, and then ended last year little changed. Kruszewski
says his mission is to simply build the firm into a larger
version of its current self: a middle-market brokerage and
investment bank. The stock is still up 10-fold since 2001.

When Kruszewski became CEO in 1997, Stifel employed 733
people and had annual revenue of $136 million. The company has
since spent at least $1.7 billion on 24 acquisitions, according
to data compiled by Bloomberg. There are now more than 5,000
employees and annual revenue exceeds $1.4 billion.

“I don’t think anybody in their wildest dreams would’ve
predicted the enormity of his success,” said Stuart Greenbaum,
former dean of Washington University’s Olin Business School in
St. Louis and a member of Stifel’s board of directors when
Kruszewski was hired. “Every growth opportunity is a failure
opportunity at the same time. I think he’s done extraordinarily
well.”

Rivals Grapple

Other mid-size brokerages and investment banks have
grappled with how to grow. Cantor Fitzgerald LP, which has
become one of the largest independent U.S. brokerages, has also
attempted to push into underwriting and advisory businesses.
Moody’s Investors Service downgraded Cantor Fitzgerald’s credit
rating to junk in October, saying the firm’s profitability has
weakened even as it diversifies.

Jefferies Group Inc., the New York-based investment bank
run by Richard Handler, has hired bankers and traders and
expanded its balance sheet to take on larger transactions.
Assets have grown from less than $15 billion in 2005 to about
$36 billion at the end of 2012, with staff surging 86 percent in
that period.

The firm agreed in November to sell itself to Leucadia
National Corp., the investment firm that’s Jefferies’s biggest
shareholder. The announcement came almost a year after
Jefferies’s shares plunged following the October 2011 bankruptcy
of MF Global Holdings Ltd. The deal will make Jefferies better
able to weather market turmoil, the companies said at the time.

‘Always’ Looking

Stifel runs a wealth-management business and an
institutional unit that includes investment banking, research,
sales and trading, catering to companies with as much as $5
billion in market value. Kruszewski said he’s comfortable
pulling between 55 percent and 65 percent of the firm’s revenue
from wealth management.

Stifel has added to both units through hiring and
acquisitions, he said. In 2009, the firm acquired about 55
brokerage branches from Zurich-based UBS for $46 million,
according to data compiled by Bloomberg. It also purchased Ryan
Beck Holdings Inc. in 2007 for about $100 million, the data
show. The company is “always” looking to add to its wealth-management business, Kruszewski said.

Analysts and investors point to Stifel’s 2005 acquisition
of Legg Mason Inc.’s capital-markets business from New York-based Citigroup as the deal that bolstered the firm’s
institutional business. Other deals include its purchase of
Thomas Weisel Partners Group Inc. in 2010 to add health-care and
technology banking.

Plate Full

“Because they stuck to their knitting through the years,
they were able to emerge from the financial crisis in an
offensive position where a lot of their competitors, larger and
smaller, were playing defense,” said Devin Ryan, an analyst at
Sandler O’Neill & Partners LP.

In 2011, Stifel had net income of $84.1 million. For 2012,
that figure is expected to jump to $138.3 million, according to
the average estimate of three analysts surveyed by Bloomberg.
Stifel has posted record net revenue every year since Kruszewski
took over as CEO. Analysts estimate revenue to reach $1.61
billion in 2012, a 14 percent increase from 2011.

Stifel’s global wealth-management group had $908.2 million
in revenue in 2011, and the institutional division had $507.4
million.

While the global wealth-management unit has room to grow,
“our plate is pretty full” on the institutional side,
Kruszewski said.

Tangible Book

Stifel’s trading floor carpeting is a patchwork of
patterns, expanded in pieces as the company adds desks and
employees. On a recent Monday afternoon, the floor was as quiet
as an insurance office. No one was standing and yelling. Bells
weren’t ringing. A few traders turned around to say “Hey,
Ron,” as Kruszewski walked by.

Last year, Stifel agreed to buy KBW Inc., an investment
bank focused on the financial services industry, in a
transaction valued at $575 million. The deal, which pays KBW
shareholders $17.50 in cash and stock, gives the New York-based
firm a valuation that is 7.4 percent higher than its closing
price on Nov. 2, the last trading day before the deal was
announced.

Stifel investors such as Randy Loving of Silvant Capital
Management LLC say they’re concerned the firm overpaid. KBW’s
shares already were trading at 1.3 times tangible book value --a
measure of how much a firm would theoretically be worth in
liquidation -- when the deal was announced, according to data
compiled by Bloomberg.

Deal Volume

“I don’t think they needed to pay the amount of money that
they paid,” said Loving, a sector portfolio manager for
Atlanta-based Silvant whose team oversees $3 billion. KBW was
“shutting down parts of the business, and had that continued, I
think it’s possible that Stifel could’ve picked up whatever
expertise they needed somewhat cheap,” he said.

Moreover, adding sales-and-trading and investment-banking
businesses increases earnings risk and volatility, Loving said.
It also makes Stifel more dependent on an upturn in banking
volume, something Loving said he’s not convinced will happen.

“When you think about Stifel as a stock, it actually did
OK during the downturn because it was devoid of all these
issues,” he said.

After reaching a March 2011 closing high of $49.60, Stifel
closed at $36.85 yesterday, down 26 percent from its peak.
Still, the firm’s shares have outperformed those of the biggest
banks since the financial crisis. Goldman Sachs Group Inc. has
declined 32 percent since the end of 2007 and Morgan Stanley has
plunged 57 percent. Stifel has gained more than 50 percent in
that period.

‘Advice Driven’

With global deal volume about half of what it was in 2007,
it may be too early to judge many of Stifel’s acquisitions, said
Errol Rudman, portfolio manager at Rudman Capital Management in
New York. The KBW deal, in addition to other institutional
purchases, positions the firm to take advantage of an upswing in
investment-banking activity, he said.

“They expanded at a time when others were contracting, and
secondly, they’ve paid prices that reflected the failed
businesses they were buying,” Rudman said. “When and if the
time changes, they’ll be leveraged to that concept of being
larger and having purchased the assets at a cheap price.”

Kruszewski’s goal is to build Stifel into a “bigger
version of what we are today” by adding employees and letting
the balance sheet grow along with it.

Hometown Culture

What they don’t plan to do, he said, is try to boost
returns by leveraging the firm’s assets.

“That has not proven to be successful,” he said. “We are
an advice-driven firm, we provide execution.”

Stifel has “a really solid name as a regional firm,”
meaning one that has a few thousand advisers instead of upwards
of 20,000, said Mindy Diamond, CEO of Diamond Consultants LLC, a
Chester, New Jersey-based search and consulting firm for the
brokerage industry.

Regional brokerages can be attractive to financial advisers
who prefer more access to senior leadership and don’t want to be
“one of the 18,000,” she said. They also appeal to those who
value culture and size more than the price of a transition
package, she said. Regional firms typically pay two times an
adviser’s trailing 12-month revenue with bigger companies paying
3 to 3 1/2 times, Diamond said.

Advisers looking for a regional firm might prefer that
Stifel is based in St. Louis instead of New York because it has
a Midwest culture that “works to its advantage,” Diamond said.
Known for Budweiser beer, barbecue ribs and ragtime music, the
city has a metro population of 2.8 million.

Indiana Native

Stifel’s headquarters are less than a mile from Busch
Stadium, home of the St. Louis Cardinals baseball team, which
has won two World Series titles since 2006. A pair of infield
box season tickets cost about $9,500 for 2013. Similar seats for
the New York Yankees are about $30,000.

Kruszewski grew up in South Bend, Indiana, about 100 miles
east of Chicago. A fan of Chicago sports teams when younger, his
allegiances are now “St. Louis through and through,” he said.

Kruszewski’s background as an accountant has been a factor
in the firm’s success integrating acquisitions, investors
including Rudman say. A graduate of Indiana University in
Bloomington, Kruszewski joined Robert W. Baird & Co. in 1989,
where he served as a managing director and chief financial
officer of the Milwaukee-based wealth-management and investment-banking firm, according to a 1997 statement from Stifel.

Cost Advantage

He decorates his office with several bull and bear statues
of his own, and parks his black Porsche in the basement garage.
Pointing to the golf clubs in his office, he says, “None of
those putters work,” before laughing and admitting it might be
the golfer who’s at fault.

Being based in St. Louis gives Stifel a cost advantage over
larger competitors, Kruszewski said. Running the same operation
in New York would be “a different story” when it comes to
expenses, he said. Still, he said he doesn’t expect New York to
lose its status as the financial center of the world.

“People say, why do you keep building the firm in light of
all these declining revenues?” Kruszewski said. “Why not?”